The pin bar strategy is a popular reversal technique used by many retail forex traders. It’s a two-bar pattern that can lead to explosive price action.
But, it can also lead to whipsawing prices too.
The idea behind the long version of this setup is that price opens within the range of the previous bar (usually near the low); trends downwards most of the session before reversing strongly, closing near the high.
As a solitary candle, the pin resembles a bullish hammer; but an actual pin bar setup only occurs when the bar closes within the range of the previous bar.
In my earlier pin bar days, results were mixed.
Occasionally they’d work well, other times nothing but disappointment.
My own stubbornness to not use confluence didn’t help much.
However, I still don’t use much confluence – and I did manage to improve trading results dramatically.
This post details what I do to minimise market noise and how I can, without indicators of any type, take only the best pin bar setups.
Different ways to trade the same setup
My philosophy has always been one of fewer trades but of better quality. Much of the standard stuff doesn’t resonate with me.
Things such as:
- buying with a market order as soon as the setup occurs on a chart
- placing a buy entry order at the high of the latest bar
- leaving a buy stop order in the market for multiple bars at a time, until the order is hit
- buying halfway down the latest bar as price retreats, in the hope of better risk-reward
Two possible entries
If we’re lucky enough there are two possible entries with this system.
The first entry order should be placed just above the latest bar (the pin bar)
And a stop-loss order placed at the open – yes folks, not the usual place advocated on Forex trading websites, many would see it as far to tight – but if you want superior results you have to be different from the crowd.
The second entry is above the high of the previous bar. A visual representation of this is shown below along with the trading rules.
Harami Pin bar trading rules
1. The latest bar must have a close that’s higher than the open
2. The latest bar must make a lower low than the previous bar
3. The real body of the latest bar must be in the top half of the bar range.
4. The read body of the latest bar must be inside the real body of the previous bar
Add on entry
5. Place a buy stop above the high of the previous bar
6. Place a stop loss at the open of the latest bar
7. If not triggered within one bar then cancel the order
Let’s now look at some of the filters I use and why.
The latest bar must have a close that’s higher than the open
In other words, the latest bar must be blue – or whatever colour you use to represent a candle with a close higher than the open.
Sure, you’ll miss some red pin trades, but the blue bar setups IMO are better. A professional trader only takes the best setups.
The presence of a harami
I simply ignore pin bars without them
Harami on the other hand, with solid real bodies, are potentially strong indicators of something important about to happen.
Again, you’re going to have to pass on a number of setups – but many of them will be sub-par anyway. Being a professional trader requires patience.
Cancel the order if not triggered after one bar.
I wrote a whole post on when to cancel your entry order here.
Having a one bar time limit on the order keeps things neat and tidy.
Setups don’t stay fresh for very long. The market goes on to do other things and the effectiveness of the signal weakens, eventually becoming redundant.
This is where I see traders go wrong.
They leave orders in the market for multiple price bars at a time, hoping for it to be triggered. But after multiple bars, those trades are nothing but noise – and usually disappoint.
If you have to leave the order in the market do so for no more than two bars maximum, any more and your essentially trading randomness.
What can go wrong – the first entry
One of the problems with this strategy is the first entry and stop loss.
There are going to be a number of times when the first order’s triggered, and then nothing much happens. The price will eventually lose momentum and at some point, you’ll be stopped out at a loss.
This loss will be a 1R loss.
I am sure many will be uncomfortable with this. I do agree that the stop loss on this initial position is tight.
However, the profits and high %r that come from the winners will be more than enough to account for them.
While the loss is 1R, the pip risk is low. Sometimes insanely low.
So, providing that you’re not loading up on contracts, or lots to make up for the small pip risk, you should be able to take these losses in your stride.
You could place the stop loss at the low of the pin. Many traders will do this. But doing this isn’t going to yield outsized %r from the winners, which is something I am aiming to do.
It’s all relative I guess, use a tight stop loss, experience more losers but large %r.
Or, use a wide stop loss, experience fewer losses but don’t achieve have a large %r.
In the longer-term the tight stop loss option will see the better results, but I understand the of losing money no matter how small can be an issue for new trade.
Psychology of the loss – first entry
Nobody likes a 1R loss, and nobody likes it happening too quickly. Unfortunately, this is what happens with this entry and stop-loss method. There is no way around it.
But, after the 1R loss you’ll be saying, why was I so stupid to place it so close?
Or, why didn’t I just take the second (more conservative) entry not the first?
Believe me, these things will be going through your head. Try to curb the urge of beating yourself up – it will only lead to more problems.
What you should do after a 1R loss like this, is remind yourself over a few trades this is a very profitable technique. You could even look over your charts and perform a manual backtest.
Once you have a few winners under your belt, then you won’t start questioning yourself nearly so much about this.
What can go wrong – the second entry
By the time the market pushes past the high of the second bar, it should be gathering lots of momentum. But, there will be times it doesn’t move much further; and will stall slightly higher than your entry point.
On these, you will likely take a small %r loss.
Rarely, if ever do I take a full 1R loss on this second entry.
Psychology of the loss – second entry
Second entry losses tend to be easier on the psyche. The %r is not nearly as high as the first entry.
But you may start saying; ‘why was I so stupid to place an add on trade, I should have just used the first?’
You need to remind yourself of just how profitable this strategy can be when the market does oblige. Again, backtesting is going to help with this.
With an aggressive filtering process on this strategy, trade frequency can below. So, it pays to be looking at a number of markets if you’re going to trade this pattern exclusively.
But this is a pattern well worth your time. I’ve had many high r multiples wins as a result of them.
Many of the best trends start from this setup, especially on daily and 8-hour charts.
Results tend to be solid across the board too, whether it be indices, forex, or commodities.
I’m aware that my militant filtering of the pin bar reversal strategy isn’t the norm – but doing what the mainstream do is often the wrong way.
Don’t take my word for it; I suggest you perform some manual backtests before implementing anything I suggest. But I think you’ll be pleasantly surprised at the nice clean trades that this setup produces.